The cryptographic infrastructure phase is entering a world of marginal costs. Like bandwidth and computation, the price of block space will rapidly tend towards zero. The only chains that can survive are those that can:

• Today's subsidies have increased.
• Capture tomorrow's non-inflationary income
• Provide infrastructure that makes applications difficult to replicate or abandon easily

But in this new environment, L1 is no longer a monopoly defined by its early advantages or native ecosystem. Instead, they have become interchangeable utilities competing in economic activities based on performance, interoperability, and cost efficiency.

Their relevance now depends on how well they can integrate into application workflows and provide services that are essential or impossible to outsource. The 'protocol premium' that once drove high valuations is being eroded, replaced by demands for real utility and performance. The repricing of many current L1/L2 markets is indicative of this trend.

The following chart includes: BERA, MOVE, SCR, STRK

Is the fat protocol argument wrong?

In 2016, Joel Monegro proposed the 'Fat Protocol Thesis,' which argues that in the crypto network, the majority of value is concentrated in the base protocol layer (such as Ethereum, Solana) rather than the application layer. This is fundamentally different from the Web2 paradigm, where applications like Facebook, Google, and Amazon capture most of the value, while protocols (such as HTTP, TCP/IP) remain commoditized.

At least in the past eight years, the fat protocol argument has indeed been correct. This can be seen from the huge difference in valuation multiples between infrastructure and applications and the corresponding returns. On average, applications continue to trade at a significant discount relative to infrastructure in terms of returns.

In this mode, cryptocurrency infrastructure has accumulated a large amount of funding and venture capital. In fact, there are so many cases that founders and builders are almost incentivized to launch another alt-L1 or generic rollup because they know venture capital will be waiting to fund them.

recentlyReportIn previous discussions, I mentioned how data availability (DA) has become popularized and inevitably tends toward zero. Based on the same premise, we can assume that all parts of the infrastructure stack will eventually become popularized and ultimately be deprived. What is the reason for this?

• Fat App Paper - The application realizes that by becoming a sovereign "application chain" and verticalizing the entire stack, it can capture more value.
• Application-specific sorting - Applications control their own transaction ordering and inclusion process. This is an alternative path for applications that do not want to bootstrap their own application chain from scratch.

Obesity Application Paper

The Fat App paper argues that successful encryption applications will capture more value than the underlying blockchain protocol. The simple argument is: Applications are businesses, and the primary task of businesses is to maximize revenue.

Some of the most successful applications in space are actually generating continuous revenue, such as: pumpfun, Hyperliquid, Jupiter, and Uniswap. What do they all have in common? Fee income. It is reasonable for these companies to control their order flow and MEV acquisition, or in many cases, become a sovereign application chain.

Vertical integration seems to be the most cost-effective direction for applications to seek to fill value leaks. The opportunity cost of not doing so increases with the growth of applications. This is great for applications, but not so good for infrastructures like Ethereum. We have seen significant signs of this phenomenon with Unichain and JupNet.

What else is left at the protocol layer?

When it comes to the speculation on the future value accumulation of the underlying protocol layer, there are two camps:

• As time goes on, base fees and transaction fees will tend towards zero. MEV will become the only remaining source of revenue and will be sought after to internalize all value for application abstraction. Protocol layers (such as Ethereum, Solana) will provide value as settlement layers, but fail to capture any value, similar to HTTP and TCP/IP.
• Cheap block space will lead to increased demand and more applications. Therefore, transaction volume will increase to offset the low base fee and accumulate value back to the protocol layer.

Let's break down the first scenario:

This idea is based on the premise that infrastructure will become completely commoditized. Whether it's DA, fees, or computational costs, it assumes that all parts of the entire stack will tend towards zero over time. Indeed, cheap and abundant block space obtained through rollups and the DA layer is eroding Ethereum's transactional monopoly status.

The Blob-based data contains (EIP-4844), which separates execution from settlement, L2 chooses alternative DA solutions, and even leads to a decrease in residual value of sequences and data storage over the past year.

However, the main evidence in this direction is that the proportion of MEV obtained by L1 block proposers is decreasing. In 2024, most of the MEV flow is occupied by searchers and relays through systems such as Flashbots, rather than Ethereum validators. Currently, 90% of Ethereum blocks are now proposed through MEV-Boost, with a significant portion processed through relays associated with Flashbots.

This doesn't even consider applications like CoW Swap, which use off-chain solver networks to handle matching and execution, completely bypassing the public memory pool and its associated MEV.

The second case relies heavily on the surge in demand and transaction volume caused by near-zero fees. It assumes that the abundance of cheap block space will lead to an increase in consumption rather than deflationary effects.

Just as the declining computing costs have driven the thriving development of the Internet, lower transaction fees will open up new categories and use cases. The main comparison here is that general computation and coordination layers are more like AWS or Linux, rather than HTTP. Ethereum and Solana are not just "settling" transactions, but achieving programmable state coordination at scale.

As the usage increases and the cost barriers decrease, the ability to support minimal trust computing becomes more valuable, not less. Low fees do not push value towards zero, but rather increase the addressable market for block space.

• Low fees>Increased network demand
• Increased network demand>Total cost revenue

Token Valuation - What does this mean for my assets?

If there's one thing to remember, it's this: capital allocation will undergo a transformation in a way that's very unfamiliar to many of us who have been here since 2016/17.

Unfortunately, the Fat Protocol argument has entrenched the illusion of the L1 premium subsidized by billions of dollars of venture capital. However, we are currently at a turning point in the value distribution curve, as evidenced by the growth of application revenue relative to the protocol layer.

When it comes to L1 valuation, we have abused the narrative, so that these tokens can no longer maintain their prices after TGE. The tens of millions of dollars in financing rounds with a valuation of tens of billions of dollars have become the norm for L1/L2 before the mainnet launch. The common trend faced by most of these new protocols is that the chart only goes down.

This does not mean that the infrastructure will disappear, but there are clear signs that the market is maturing. L1/L2 transactions have reached saturation. The low circulation and high FDV sentiment indicate this. Compared to previous cycles, the issuance price of L1 has grown exponentially. Monad, Bera, and Story Protocol have raised billions of dollars before going online, while Solana raised 45 million US dollars (including public token sales).

The next phase will not be led by chains capable of achieving 100,000 TPS through speed. It will be driven by focused, composable applications that prioritize utility over architecture and sustainability over speculation. The winners will be those closest to the source of demand, not the finality of blocks.

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